A 401k Loan? Don't Even Think About It!

A 401k loan is not an option if you are serious about your retirement planning and provision.

Tapping into your 401k early is actually easy. There's very little
paperwork required. No credit check is required and you need not
motivate the reason for the loan. Granted, during a crisis it might be
your cheapest and quickest way to get funds, but it may have devastating
consequences in the longer term.

Borrowing against your 401k plan is no different from borrowing from
any retirement provision plan. However, it puts invisible brakes on your
provision plan and may seriously bite you in the back when you approach
retirement.

Most
plans would allow you to borrow up to 50% of your vested balance to a
maximum of $50,000. You won't be able to borrow against the cumulative
balance of your employer's contribution.

There would be a substantial minimum amount set for the loan to discourage the taking of small loans frequently.

The maximum repayment period for personal loans is five years.

You'll
have to repay the loan in equal installments deducted directly from
your paycheck until the loan is repaid. It would leave you with less
spending money.

The interest rate would be set at the time you enter the loan agreement and would normally be at prime plus one.

Loan processing fees may be in force.

If
you leave your job, either by choice or through a layoff, you must
repay the loan immediately - usually within 60 days - or face penalties.

If
you stop making contributions to your 401k plan while you repay your
401k loan, you'll be creating an even bigger hole in your retirement
savings. Some 401k plans have a rule that you can’t contribute to your
401k until you've completely repaid the loan. So, you would be missing
out on the opportunity to increase your retirement savings. If your
employer matches contributions, that’s even more money you won’t have
when you retire.

Asset leakage is the learned term used for the
long term financial loss suffered when you loan against your retirement
provision plan. It is in your best interest to avoid this subtle
leakage.